Active stock picking for the cost of passive investing? J.P. Morgan Asset Management says it can be done

You don't have to choose anymore between passive exposure and active stock picking, says Piera Elisa Grassi of J.P. Morgan Asset Management.
Hans Lee

Livewire Markets

Unless you're comfortable simply tracking the index or placing your financial fate in someone else's hands, stock picking is one of the more likely avenues of beating the market. It's a skill that takes a lot of time to develop and one that even seasoned professionals struggle at from time to time. After all, everyone has biases or makes assumptions that may end up distorting your thesis for why you buy, hold, or sell a company. 

Enter the JPMorgan Global Research Enhanced Index Equity Active ETF (JREG), run by Piera Elisa Grassi and Raffaele Zingone in London and New York respectively, and listed here in Australia. 

The objective is simple - build a diversified portfolio of global equities without opening yourself up to risks that come with owning a run-of-the-mill index ETF. In essence, a publicly-listed managed fund that does all the hard work for you.

So why should Australian investors get involved - especially when there are now multiple ETFs which can track the home-grown ASX 200? Recently, I spoke to Grassi in a bid to get the answer to this question and others.

Piera Elisa Grassi, J.P. Morgan Asset Management 

About the ETF

The Global Research Enhanced Index Strategy has been running since May 2015 and available to Australian investors via hedge and unhedged mutual funds. The team listed the JPMorgan Global Research Enhanced Index Equity Active ETF (ASX: JREG) in November 2022 and it is designed "to achieve a long-term return in excess of the benchmark" by opening investors up to equities that can produce capital appreciation without generating as much risk.

There are 709 holdings in the fund altogether, 66% of which are domiciled in the US and 21% of which are information technology-centric. All of its top-10 holdings are large or mega-caps with the largest individual holding being Apple (NASDAQ: AAPL). 

There are no Australian stocks in the fund, although Rio Tinto's London listing is a component. Its management fee is 0.3%.

Why should investors pick an actively managed ETF like yours?

According to Market Index, there are currently 11 ETFs that track the ASX in some shape or form (ranging from the ASX 20 exclusively to the ASX Small Ords exclusively). It's also true that the ASX 200 outperformed the MSCI World Index last year. So we asked Grassi why Australian investors should buy a stake in a global equities ETF like the one she runs.

"Equity markets have been volatile and returns are also expected to be lower over the long term. Such a scenario can be quite unsettling and growth-oriented investors may wish to explore opportunities to seek excess returns as part of a diversified portfolio," Grassi said.

With this thought in mind, one of the team's solutions has been to create JREG - a fund designed to combine a proven stock picking process with with the cost-effective benefits of passive investing. 

"Our REI equity funds and ETFs seek positive alpha at low tracking error, providing a range of highly efficient tools that can be used to complement existing core portfolios, add diversification or to implement tactical views," she added.

Why does the fund endeavour to be style, region, and sector-neutral?

There are two reasons why the fund actively tries to be neutral across regions, styles, and sectors.

"Keeping tracking error low is important in the REI strategy. Tracking error helps us measure the risk we take versus the index – when markets are highly volatile, measuring tracking error helps to reduce the draw down," Grassi said.

From inception to the end of March 2023, the JREG tracking error stood at just 0.68%. This implies that the fund hugs its global benchmark quite closely (in this case, the MSCI World ex-Australia Index). 

This is also important to note "neutral" in this context does not mean a straight-forward and equal division of regions, sectors, and styles. Rather, the fund is neutral from a benchmark perspective. 70% of the MSCI World ex-Australia Index's components are US-based. This, in turn, explains why 66% of the JPMorgan Global Research Enhanced Index Equity Active ETF is invested in US companies. 

The other reason for the fund's neutrality is to do with its information ratio (IR). 

"IR is the relationship between excess return and the tracking error. We seek to achieve consistent IR through the different market cycles – and IR measures how efficient the portfolio manager is in generating alpha," Grassi said while adding that the fund's IR since inception has been more than double the academically "strong" standard.

What is your process for finding alpha in global equity markets?

Grassi describes the fund's investment process as a balance of "simplicity with effectiveness". 

"Our objective is to translate our stock specific insights into our REI portfolios while keeping the structure of the portfolios index-like," Grassi said. 

But many ETF providers have their own research houses which conduct fundamental and top-down research on the assets in their products. So what makes J.P. Morgan different?

"We achieve the ‘E’ in the strategy by applying the insights of our global team of 90+ research analysts. Our team of career analysts carry out in-depth research on over 2,500 stocks, utilising a disciplined valuation framework. These insights are then packaged into an index-like portfolio, by applying small overweight or underweight position in certain stocks," she said. 

How many is too many?

One estimate suggests there are more than 58,000 publicly listed companies globally. Of these, the team look at 2,500 companies in-depth. And of those 2,500, more than 700 have a place in the fund. This is a far larger figure than those of other funds in the Livewire stable - some of which have as little as 15-20 global companies in their respective funds. 

So I posed the inevitable question to Grassi - is the fund at risk of being too diversified to capture meaningful upside?

Grassi respectfully replied that it hasn't been an issue so far, with the strategy having been put through its paces over the past two decades. 

"Since inception in 2003, our REI strategy has continued to see both short- and long-term alpha generation against the benchmark across various market environments – whether it is value or growth orientated".

Grassi adds that the alpha generation has been driven by "the strength of our team of research analysts presenting a wide breadth of investment opportunities – which saw 13 out of 19 sectors under coverage contributing positively to the strategy’s performance".

And finally, Grassi talks to the importance of breadth of coverage amid the changing macro environment:

"We believe our long-standing yet ever improving fundamental research process will be rewarded particularly as we are entering a normalised interest rate environment".

Click here for more information about the strategy.

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Hans Lee
Content Editor
Livewire Markets

Hans is part of Livewire's content team. He is the moderator and creator of Signal or Noise. He also writes the LW-MI Morning Wrap on Tuesdays and Thursdays.

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